AT&T To Phase Out Its Consumer Markets

Services to be phased out include the company's long-distance and local offerings.

July 22, 2004

4 Min Read
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AT&T, the company that pioneered the U.S. public telephone system, announced Thursday that it is hanging up on the nation's consumer-telephone markets. Although not unexpected--the firm had announced a few weeks ago that it would no longer market its consumer services in seven states--the suddenness of the announcement surprised the industry.

The services to be phased out include the company's long-distance and local offerings. The firm emphasized that it would continue to serve its existing consumer customers and that it would continue to promote its emerging VoIP CallVantage offerings. AT&T will also concentrate on its offerings to business, where it has a strong position.

"It was inevitable," said Pete Wilson, president and CEO of telephony consultancy Telwares Inc., in an interview. "Here's the dominant market-share guy and he's conceding the market." Wilson noted that market-share figures on the U.S. telephone front show AT&T with 30 percent of the consumer market.

"There's probably some strategy underpinning the swiftness of this decision," said Wilson. "The announcement may position the [consumer] business to make it more attractive to be acquired. That's my speculation."

The suddenness of the decision took many by surprise, because there were efforts to hold the line on the move--which will certainly push telephone bills higher--until after the November elections. Another nail in the AT&T consumer coffin surfaced this week, with press reports that the FCC was developing a plan that would enable the regional Bell operating companies (RBOCs) to raise access-fee rates by as much as 15 percent.The access fees paid to the RBOCs by AT&T and other independent competitors are high enough that there's a strong feeling that making a profit going forward will be difficult, if not impossible. The other major deliverer of long-distance service to consumers is MCI, and that firm has already indicated it is considering exiting the consumer-telephone business.

AT&T's chairman and CEO David Dorman said the company will concentrate efforts on its business customers. He said: "This decision means that AT&T will focus on lines of business where we are a clear leader. Despite the near-term challenges associated with a difficult industry environment, we are confident that AT&T's cost structure, customer base, strong balance sheet, and cash flow give us the flexibility to continue investing for success in the long run."

Indeed, in announcing its second-quarter earnings Thursday, AT&T noted that its AT&T Business unit "showed an improvement in market share trends at the high end of the market, consistent with its strategy of keeping and building its enterprise customer base." The firm noted that it logged some big customer wins in the quarter, including Lockheed Martin, Deutsche Bank, Providea, the U.S. Army, and the IRS.

"AT&T still has the best network in the world," said Telwares' Wilson in discussing the firm's business-network offering. "Dorman cut his teeth developing enterprise markets at Sprint. He knows that business. And most of his key lieutenants are from backgrounds selling and serving enterprise clients." As revenues from AT&T's consumer markets dwindled, the business percentage of its overall markets grew to where it is an estimated 70 percent of the firm's entire revenues.

AT&T's decision to exit consumer markets, along with MCI's that hints it wants to follow suit, raises immediate questions about the federal government's 1984 breakup of AT&T into several units, including the extant RBOCs. Today, nearly 90 percent of U.S. consumers deal with an RBOC monopoly for a telephone landline, and the promised competition from AT&T, MCI, and a few other independents is now in jeopardy.What went wrong?

"No matter which direction it came from, the wind was always blowing in AT&T's face," said analyst Wilson, in listing the reasons behind AT&T's consumer problems. He cited five:

First and foremost, the March decision by the U.S. Court of Appeals for the District of Columbia paved the way for the RBOCs to raise the access fees they charge to AT&T and other firms to connect to their networks.

AT&T's decision to spin out its cell-phone operation--it is being acquired by Cingular, jointly owned by RBOCs BellSouth and SBC--meant that it was cut out from the lucrative wireless market.

The "Do Not Call" Registry meant that AT&T was cut off from its most effective marketing tool--it couldn't call potential customers any more.The RBOCs were given permission to enter long-distance markets in most states, while AT&T was shackled in its attempts to offer local-telephone service. Cable companies are emerging as a force in the long distance market, and the trajectory of their businesses didn't bode well for AT&T.

In its earnings statement for the second quarter, AT&T said net income was $108 million versus $536 million for the previous year's comparable quarter. Revenue was $7.6 billion, which the firm said represented a 13.2 percent decline. Of the $7.6 billion revenue figure, $5.6 billion was from AT&T Business and $2.0 billion from AT&T Consumer.

The company noted that its long-distance-voice revenue decreased 17.6 percent from the prior year.

AT&T also noted its difficulties in mounting a successful campaign to sell its consumer offerings in a bundle. The lack of both a cell-phone offering and an affordable local-phone feature hit it hard. "AT&T has determined that it cannot effectively compete against bundled competition by selling only standalone long distance," the firm stated.

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